buyers have reached the limit of their elasticity shock as market works

Thursday, May 29, 2014 by Ed Mead

The Market


Hype doesn’t help, we know that. Help to buy is an example. Only c. 2% of total transactions since its inception, 94% of which have been at £350k or below and a tiny proportion have been in London yet the headlines have attempted to link all this to a bubble. The result of this is that sellers, influenced as we know by the media, convince themselves that prices are on an unstoppable upward trend and buyers think the “bubble” is about to burst.


Luckily the truth is more prosaic and perhaps gives us a pointer to how fragile the overall recovery is. Market forces have, as we know, driven prices up in London and the SE due to lack of supply, and not a raging demand side. Buyers, seemingly feeling the beginning of another credit cycle, have been a bit more confident about borrowing and having been buoyed up by economic news ventured into the market. However, people aren’t stupid and luckily these buyers set the market by deciding what they’ll pay and our experience tells us they’ve reached the limit of their elasticity. That same experience tells us that sellers will usually take c. 3 months to understand the changes and react. A sad corollary of this supply light market is that competition between increased numbers of agents fighting for a smaller pie is persuading some sellers to listen to unscrupulous ones telling them they can still get their prices despite evidence to the contrary.


Press talk is beginning to catch up and understand how the dynamic is changing. In London this boom has a different feel insofar as previous PCL peaks have been fuelled by City types borrowing large and consequently vulnerable to interest rate rises, this time it seems most of the new influx aren’t. Hence when rates rise its unlikely there’ll be a mark to market shift in PCL as recent buyers won’t have to sell. This means that it’s highly unlikely that the areas around the fringe, what we call Emerging Prime, will not fall back and so rather than the bubble we’ve seen talk about we consider recent rises a re-rating of these areas. Some may say long overdue.


Less reported has been the fact that the Land Registry’s March update showed a UK house price FALL of 0.4% which followed a 0.2% fall the month before and meant a less than cataclysmic annual rise of 5.6%. We clearly can’t rely on two months figures but it is perhaps showing the start of something.


Bearing in mind that the Bank of England is attempting to pull all levers to cool a supposedly overheating market in order to avoid pushing the nuclear interest rate button you might feel for Messrs Cameron and Osborne should their vote winning house price surge fizzle out mid/late autumn as is now looking likely. All this because the BoE overreacted to something the fragile demand side was always likely to call time on anyway. Frosty.